By: Robin Platte
Many small businesses are formed between family members or friends. But when a relationship, or the business itself, starts to break down, an owner may decide that it is time to move on. In more positive instances, owners may leave a business to pursue a new career, make more time for hobbies, or retire. This post breaks down some important steps to consider if you are thinking about leaving your business.communication is key
Before getting into the nitty-gritty of withdrawing from your business, you should consider when and how you will inform your fellow owners that you are leaving. This conversation is often difficult and emotional, but you can prepare for the inevitable by reflecting on the specific reasons for your departure. Honest communication between owners can make your withdrawal less complicated and help you avoid issues later in the process.
review controlling documents
Before you initiate your departure from the business, you will need to review the Operating Agreement (if your business is an LLC) or the Partnership Agreement (if your business is a partnership). Review these documents to determine if any provisions govern the withdrawal of an owner. Keep an eye out for a buyout provision, which may describe how to determine the price of your ownership interest in the business or whether anyone has a right of first refusal to buy your interest.
If your LLC or partnership does not have an Operating Agreement or Partnership Agreement, state law will control your withdrawal from the business. The relevant state statutes contain provisions detailing how to proceed with the sale or transfer of your interest in the business.
Generally, an owner of an LLC may withdraw from the business if they provide written notice to the other members within a specified time frame. However, provisions in the Operating Agreement may contain more stringent requirements. Again, you must review your business’s controlling documents, if they exist, before assuming state law will control your withdrawal.
Similarly, a partner may generally withdraw from a partnership at any time, so long as they provide the other partners with adequate notice of their withdrawal. However, in some states, the withdrawal of a partner will trigger a dissolution of the partnership. If your partnership does not have a Partnership Agreement in place, it may be best to contact an attorney to help you determine whether this provision applies in your state.
valuate your business
Once you have an understanding of what provisions will govern your withdrawal from your business, you will need to determine the value of the business. This includes obtaining a full grasp of your business’s assets and liabilities, as well as potential future earnings or distributions. If your business’s bookkeeping is unclear, you may want to consider obtaining a third-party valuation. Business valuations can be expensive, but the price tag is well worth the ability to successfully negotiate the best value for your ownership interest in the business.
finalize terms
An attorney can help you negotiate with your fellow owners and record the final terms of your departure. This contract, sometimes called a separation agreement, will likely contain a provision on who will buy your interest in the business and how you will be paid for your interest. It may also contain a provision on how existing obligations will be distributed between owners. Two common types of payments for departing owners’ interest in the business are buyouts and earn-outs. A buyout is a sale of your ownership interest governed by a preexisting agreement, such as a buyout or buy/sell provision in a Partnership or Operating Agreement. Such provisions contain a formula for determining the price of the ownership interest. An earn-out is a sale of your interest in which the price is contingent on the business’s future earnings. If any business contracts, debts, or other documents include your name, you should ensure that the separation agreement protects you against future liability. Again, an attorney can help you negotiate an appropriate provision to address this concern.
reaching resolution
If reaching a final agreement between yourself and your fellow owners isn’t going as smoothly as you had hoped, you may want to consider taking part in alternative dispute resolution (ADR) with your fellow owners. Consider participating in arbitration or mediation to resolve any outstanding issues between owners to avoid future litigation. ADR can be costly, but you and your fellow owners will be able to resolve disputes much faster than if you litigate unresolved issues in court. Some ADR processes impose binding decisions on the parties, so make sure that you understand the terms of the process before agreeing to participate.
Announcing your departure
Before your departure, consult with your fellow owners on if, when, and how you will announce your withdrawal from the business. Be mindful that telling customers, employees, competitors, or other related parties may expose you to liability.
Withdrawing from a business that you built from the ground up can be challenging and emotional. No matter your reason for leaving your business behind, you should take steps to protect yourself as you enter the next chapter of your life.
This post has been reproduced and updated with the author’s permission. It was originally authored on April 24, 2024 and can be found here.
Robin Platte, at the time of this post, is a recent graduate of Penn State Dickinson Law. Before attending law school, Robin earned her B.A. in Political Science from Virginia Commonwealth University and spent several years managing e-commerce platforms at a digital marketing start-up.
Sources:
All photos contained in this post were found on https://unsplash.com/
https://www.nolo.com/legal-encyclopedia/withdrawing-from-partnership.html
https://www.mylawteam.com/articles/partnerships/leaving-partnership-limited-liability-company-llc/
https://www.jdsupra.com/legalnews/about-that-llc-buyout-39640/
https://online.hbs.edu/blog/post/how-to-value-a-company
